Q: I have a superannuation fund accumulating (although I am no longer making super contributions). I am 52 and I intend retiring at age 60. When I do retire can I withdraw the entire super fund as a lump sum and deposit it in to my bank account? What would the tax implications be for taking the entire fund as a lump sum? Or could I turn the fund into a super pension and receive a regular income? What are the tax implications for that option? The entire value of my fund is preserved.
A: Before I respond to the question, for those readers who are not familiar with the term ‘preserved’ in relation to super benefits, the federal government has rules in place to ensure that Australians don’t access super benefits before they retire or before they satisfy another condition of release, such as starting a special type of super pension, or suffering permanent disability. You can read about ‘preservation’ in the SuperGuide article Accessing super: What is my preservation age?, and the conditions of release in the SuperGuide article Accessing super early: 14 legal reasons to cash your super.
Your question has two parts – the tax treatment when taking super benefits as a lump sum, and the tax treatment when taking super benefits as an income stream (pension).
You mention that you intend to retire at age 60, so this article only deals with the tax treatment of lump sums and super pensions taken on or after the age of 60. If you seek information on the tax treatment of super benefits withdrawn before age 60, then see SuperGuide article Retiring before the age of 60: the tax deal.
Generally speaking you can expect the following tax treatment for Australian superannuation benefits received on or after the age of 60:
1. Treatment of lump sums, on or after age 60
In nearly all cases, an individual retiring from the workforce on or after the age of 60 can withdraw super benefits as a lump sum and no tax will be payable on those super benefits in Australia (although Australian citizens living overseas will need to get tax advice on their individual circumstances).
A major exception to this statement that ‘no tax will be payable’ is: If you’re a long-term member of one of the older public sector funds, then some or nearly all of your super benefits may be considered ‘untaxed benefits’ or super from an ‘untaxed source’. If some, or all, of your super benefits are treated as super benefits from an untaxed source, this means that no earnings or contributions tax has been payable, over the life of the super benefits. When the super benefit is withdrawn from the fund, a benefits tax is payable on the taxable component of the benefit from these untaxed benefits, even when taken after the age of 60. I explain the tax-treatment of super benefits (in particular, untaxed super benefits) from the age of 60 in the SuperGuide article Tax-free super for over-60s, except for some.
Note: If you’re a long-term member of certain employer-run super funds (usually major companies), you may be required to take an income stream (pension) from the fund rather than a lump sum. I believe this exception also applies to a minority of defined benefit public sector funds. Most Australians are members of super funds that permit lump sum payments.
Important: By taking super benefits out of the super system, the concessional tax rate of 15% on fund earnings will no longer apply. If a person withdraws the super benefit from the super system and invests the money in a non-superannuation environment, then any earnings will be subject to the person’s marginal tax rate. Australian marginal tax rates can range from zero to 47% (plus Medicare levy). (If you’re an Australian living overseas, I suggest you check with a tax expert about the implications of an individual living in another country receiving income from an Australian source.) If you have reached Age Pension age (currently 65 years), you may be eligible for special tax treatment on your non-super income (for more information see SuperGuide article, No tax in retirement because you SAPTO (updated rates).
If an individual starts a superannuation income stream (pension) rather than taking a lump sum, then any earnings on the super fund assets funding the income stream are exempt from tax. This exemption from tax on super fund pension earnings is in addition to tax-free super benefit payments for over-60s. I explain this further in the next section.
2. Treatment of income streams (pensions) on or after age 60
If you’re aged 60 or over and retired, you can take your super benefits as an income stream (or as a lump sum – refer earlier) and pay no tax in Australia on your benefit payments. The major exception to this general rule is where an individual is a long-term member of a certain type of public sector super fund, and then some tax may be payable on the taxable component of the pension (or lump sum).
The earnings on any investments financing a superannuation pension are also tax-free (or to be precise, tax exempt), whether you retire before or after the age of 60.
Since the introduction of tax-free super benefits for over-60s from July 2007, retirement planning has definitely become easier, but I suggest that anyone thinking about retirement should check their personal circumstances with an accountant (and for our Aussie expats scattered around the world – an Australian accountant/adviser, as well as your overseas local accountant/adviser).